Navigating Business Closure
When faced with the decision of closing down a business, many people often wonder whether liquidation or dissolution is the better choice. Although both options involve shutting down the company, there are distinct differences between them that we should understand.
Dissolution refers to the voluntary legal closure of a business. It occurs when a company decides to cease its operations. There could be various reasons for dissolution, such as the company having fulfilled its purpose and no longer being necessary, or the owner wishing to retire without a succession plan in place.
To dissolve your limited company, you can have it "struck off" the Companies Register, effectively dissolving it. However, certain conditions must be met for this option to be available. Your company must not have engaged in any trading or stock sales within the last three months, changed its name during the same period, faced the threat of liquidation, entered into agreements with creditors, or had any outstanding directors' loans to repay. Additionally, the company's assets must have been dealt with correctly.
When applying for the strike-off process, you must fulfil specific responsibilities to ensure the proper closure of your business. This includes wrapping up any loose ends, settling any outstanding debts with creditors, and taking care of all necessary procedures before officially closing your company. For more detailed guidance on closing a business, you can refer to the Companies House website.
Dissolving a business is generally considered a more positive option than liquidating it. However, if your company fails to meet the aforementioned criteria, voluntary liquidation may be necessary.
Liquidation, also known as "winding up" a company, involves a formal insolvency procedure to terminate an unwanted or insolvent business. When a company goes into liquidation, its assets are sold, and the proceeds are used to pay off its debts. Any remaining funds are then distributed among the shareholders. If the money has not been distributed to the shareholders by the time the company is removed from the register, it will go to the state. To reclaim these funds, you would need to restore your company after it has been removed from the register.
There are three types of liquidation to consider:
- Creditors' Voluntary Liquidation (CVL): This occurs when a company is unable to meet its debt obligations and is insolvent. The directors and shareholders decide to wind up the company, and afterward, the agreement of the creditors is sought.
- Compulsory Liquidation (Court Liquidation): In this case, a company is unable to pay its debts as they fall due and a creditor applies to the court to appoint a liquidator. It is also possible for the company's directors to initiate this route into liquidation.
- Members' Voluntary Liquidation (MVL): This type of liquidation is suitable when a company can pay its debts and is solvent, but the director(s) wish to extract the value held in the company and bring it to a structured close.
Liquidating a business can be a complex process, but at Thomson Cooper, we have a team of highly experienced professionals who can assist you throughout the entire process, making it easier for you to navigate.
If you require more information or guidance, please feel free to contact Richard Gardiner, Head of our Corporate Recovery and Debt Solutions Department, at rgardiner@thomsoncooper.com or by phone at 01383 628800 or 07872 376105.
About the author
Richard Gardiner
Richard is Head of our Corporate Recovery and Debt Solutions Department.
He is a licensed Insolvency Practitioner with the Institute of Chartered Accountants of Scotland.
He manages a large team of managers and support staff who offer the complete spectrum of personal and business debt solutions available under Scottish legislation.